Wages data raising inflationary questions

So the Average Weekly Wages data was released by the ABS today. The quarterly print was +1.2% (higher than the +1% expected), while last quarter was revised up from +1% to +1.1%. The y-o-y rate has also jumped from +3.8% to +4.4%. This brings it well above the 4.3% average since 1993 (see chart). The worrying thing is that this is being accompanied by very low labour productivity growth, which in turn makes the acceptable non-inflationary wage growth threshold lower (see CBA comments below).

In the context of the wage index data from yesterday, CBA commented:

"The QII WPI result was bang on market expectations of a 0.9% rise (CBA f/c 1.0%). Annual wages growth ticked down a point to 3.8%. But annual wages growth has been in a clear uptrend since the cyclical low reading of 2.9%pa posted in HII 2009 – in wake of the GFC induced slowdown in the local economy. The QII 2011 outcome is still below the old “line in the sand level” of 4.5%pa – readings above which used to jangle RBA nerves about the likely boost to underlying inflation.

But the catch 22 here is that the “old” line in the sand assumed productivity growth of 2.0%pa. With the RBA continuing harp on about and lament zero productivity growth in the economy in recent times, the “new” RBA line in the sand for wages is probably somewhere south of 4%. And private sector wages and total wages growth have been running in a 3.8%‑4%corridor over the past three quarters. With the economy expected to rebound from its natural disaster‑ induced soft patch in HI to around 4%pa in 2011/12, labour market conditions are likely to tighten further, propelling broad based wages higher still over the coming 12 months...

Growth in the wage price index has now picked back up to pre‑GFC levels. Given the weaker than average productivity outcomes, solid wage inflation poses a significant risk to the inflation outlook. Unit labour costs rose at an 8.0%pa pace in the QI GDP figures, though some of this deterioration reflected reduced output due to natural disasters. We expect continued strong wages growth in the year ahead as the jobs market tightens further, to levels the RBA would not be comfortable with in terms of the inflation outlook given negligible productivity growth. Growth in average weekly incomes is likely to remain solid as well, supporting household income growth. We see wages and average earnings growth continuing to exceed inflation, resulting in rising real household incomes.

Yesterday’s release of the August Board minutes confirmed RBA anxiety about poor productivity outcomes. Specifically, the inevitable inflationary consequences of a continuation of nominal wages and profits growth at paces similar to the past two decades without any fundamental underpinning from productivity improvements. With an expectation that the terms of trade is likely to have peaked, strong productivity improvements will be needed in future to maintain strong growth in nominal wages without inflation rising."